Lower Cost of Instant Payments is Opening the Market for Small and Mid-Sized Banks

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A new study by Lipis Advisors has found that the cost of migrating to Instant Payments infrastructure for small and medium sized banks is far lower and more controllable than previously thought. This revelation suggests that smaller banks are actually better positioned to respond to regulatory and consumer pressures for Instant Payments, and that real time banking doesn’t need to be the preserve of large, well-funded banks.

The research provides the first insights into the real world experiences, costs and challenges of global banks and processors when implementing Instant Payment solutions and shatters some of the myths surrounding Instant Payment implementations across the globe. With banks struggling to make a business case for the transition to Instant Payments according to the research, the study provides a case for change.

The research, “Implementing Instant Payments: Insights from Early Adopters”, reveals that choice of vendor is critical, with smaller banks relying far more upon their solutions provider for their specific expertise and guidance. Larger more established providers typically charged smaller banks around 20% per annum of implementation costs in annual maintenance fees.

Surprisingly, testing and integration costs were reported to make up 60% of the initial cost of implementation. Hardware, software licencing costs and transaction volumes were not sizeable contributors to cumulative costs over a five-year period. This suggests smaller banks may be missing out on the commercial opportunities that Instant Payments provide because of fears around these costs. Instead maintenance fees, comprising of software updates, ongoing license fees and regular enhancements, were found to be the biggest expense over the period.

Even when this is taken into account, the five-year cumulative cost for the largest projects were reported to be less than €5m on average. By using modular solutions, where individual elements are combined with a core system in a targeted approach to focus specifically on Instant Payments, the cumulative cost over five years could drop as low as €500,000.

“Through discussion with executives we found that using a targeted approach to implement Instant Payments capabilities is the most efficient strategy. This enables banks to optimise existing IT resources, protect legacy investment, lower cost and cope with fast changing internal and external requirements. Investment in testing for example, currently a remarkable 25% of the initial cost, provides a real opportunity for savings,” said Dr. Leo Lipis, founder of Lipis Advisors. “Instant Payments has been seen as the domain of large multinational banks with the resources to implement complicated, cumbersome systems. This research clearly shows that this isn’t the reality. By using a solution from an experienced vendor with genuine payments expertise, small and medium sized banks can rapidly take advantage of the benefits that Instant Payments offers.”

Key Findings

Cumulative project costs over five years can be as low as €500,000

Maintenance fees are on average 20% of the initial solution’s cost per year

Transaction volumes are not the biggest driver of implementation costs

Integration and testing require the largest investment

Implementation costs are split between:

40% on hardware and software licensing costs

35% on system integration, configuration and customisation

25% for system testing

“Prior to this study small and medium sized banks looking to transition to Instant Payments had no way of understanding what this involved. The findings show that, contrary to received wisdom, Instant Payments is a feasible proposition for everyone and does not require endless budgets and massive headcount. Building a compelling business case has been a major barrier to deployment thus far. This research will help banks understand the approaches, challenges and complexities to aid strategic planning,” said Tom Hay, Head of Payments at Icon Solutions. “Instant Payments is here to stay and it’s only through enabling small and medium sized banks to connect to national schemes that consumers and businesses across the world will be able to take full advantage of its benefits.”

The research, conducted by Lipis Advisors in June and July 2016, was commissioned by Icon Solutions is based on 15 interviews with senior representatives from banks, processors and vendors as well as six case studies from banks that have made the move to Instant Payments.

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